Cash management is an ongoing process which should be proactively managed to get through these uncertain times. Cash is the oxygen for your business; without cash your business will not survive. There are a few strategies which a business could implement to help improve their overall cash-flow position.
These strategies include:
Quicker invoicing and debtor collection. The traditional process of invoicing clients at the end of each month can delay debtor collection. Sending invoices promptly after a product has been delivered or a service performed can increase the likelihood of being paid earlier. Proactive debtor management will ensure outstanding debtors are appropriately managed and reduces the risk of it becoming a bad debt. Using online invoicing and payment processing tools can also help streamline the overall process.
Improved inventory management. Poor inventory management ties up cash longer due to longer inventory turnover, which in turn increases the risk of having obsolete stock. Offering discounts on slow moving goods or obsolete stock will help turn inventory back into cash. When these goods have been sold out, consider whether you should continue to stock these goods in the future. Reducing the reordering quantities or moving towards indent ordering will minimise the amount of cash held up in inventory.
Revisit your payment terms. Whether these are payment terms offered to your customers or payment terms you have with your suppliers, there may be an opportunity to explore prompt payment discounts, prepaying goods or services on better terms, or deferred payment options in particular circumstances. There may be scope to renegotiate payment terms or receive lower interest rates from suppliers.
Dispose of surplus assets. You may have surplus assets, either in the warehouse or office, which you no longer require. Consider selling any surplus assets to realise cash immediately. Alternatively, consider leasing or renting any surplus assets out, or offer third party manufacturing services to increase the usage of partially utilised assets to generate additional cash flows.
Diversify your client base. Having a small number of clients can increase the risk to your business if one of these clients starts having cash flow issues. Increasing the number of clients which you deal with can help spread this risk.
Consider financing options. There are some financing products which can help with cash management. Trade finance, for example, is essentially a short-term loan (typically of up to six months) which allows a business to purchase goods. The purchased goods are used as security for the trade finance loan. The length of this trade finance loan is typically aligned to the average amount of time the business would take from the time of purchasing the goods to when the goods are sold and converted back into cash again. Invoice financing is another option which helps a business realise a percentage of an issued customer invoice value as cash now. The invoice financing lender will take security over that invoice as well as a small portion of the invoice value as its fee for this service.
Please note that not all options will suit your needs.
A robust and reliable cash-flow forecast should be incorporated into any cash management process. An effective cash-flow forecast will be set on a daily basis as this will give a business greater visibility over its cash cycle. This insight will help a business manage its short-term liquidity needs, including dealing with any cash deficits during the period. The starting point for creating a daily cash-flow forecast will be linking this to the business’s annual three-way budget. The annual budget will outline the business’s finance plan, when it expects to spend funds to achieve its strategic objectives, capital expenditure budget, and daily operations. By incorporating this information into the daily cash-flow forecast, management will be able to make more informed decisions and be able to proactively shape the future direction of the business.
Please get in touch with our advisory team at Bellingham Wallace if you would like to know more about improving your business’s cash management and how cash-flow forecasts can benefit you.
